PP 7767/09/2010(025354

)

Malaysia

10 June 2010

Corporate Highlights
Sector Upda te

RHB Research Institute Sdn Bhd A member of the RHB Banking Group
Company No: 233327 -M

10 June 2010 Recom : Neutral (Downgraded)

MARKET DATELINE

Oil And Gas
Taking A More Cautious View

Table 1 : Oil And Gas Sector Valuations Fair Price FYE value (RM/s) Dialog EPIC Kencana SapuraCrest^ Wah Seong P Gas^ KNM Petra Perdana Sector Avg Sector Avg (excl Pet Gas) ^ FY10-11 valuations refer to those of FY11-12 Jun Dec July Jan Dec Mar Dec Dec 1.05 1.62 1.39 2.05 2.20 9.83 0.50 1.19 (RM/s) 1.23 2.72 1.52 2.38 2.38 10.71 0.49 1.15

EPS (sen) FY10 6.4 26.9 10.2 16.6 16.1 62.6 2.9 6.8 FY11 9.3 27.2 11.7 18.3 18.3 64.4 4.9 12.2

EPS growth (%) FY10 -3.4 7.9 42.9 35.7 23.1 31.6 -24.1 -31.1 24.5 22.2 FY11 45.4 1.1 15.0 10.3 14.0 2.9 69.7 79.9 13.9 28.7 16.5 6.0 13.6 12.3 13.7 15.7 17.5 17.6 14.2 12.3

PER (x) FY10 FY11 11.3 6.0 11.8 11.2 12.0 15.3 10.3 9.8 12.5 9.6

P/NTA (x) FY10 4.1 0.8 2.7 1.9 2.8 3.0 8.0 0.7

P/CF (x) FY10 14.3 4.2 10.1 5.3 4.7 10.6 13.4 1.3

GDY (%) FY10 3.3 5.8 0.5 3.4 2.9 6.8 4.0 1.3

Rec OP OP MP MP MP MP UP UP

Oil price assumptions. The US EIA in its most recent Short-Term Energy Outlook report, has lowered its 2010 forecast for average WTI spot price to US$78.75/barrel from last month’s projection of US$82.18. While anticipation of stronger crude oil demand has previously helped to support oil price above US$65/barrel, we believe the near- to medium-term outlook has turned cautious. Demand for crude oil remains relatively lacklustre, while supply remains ample. Moreover, financial demand has dwindled due to credit tightening. In the absence of fundamental catalysts for crude oil prices to move higher, we have assumed prices will continue to hover at current levels of US$65-75 at least through the 2H10, before picking up slightly in 2011 to a range of US$75-85. In our view, longer-range projections are unreliable at this stage, although our expectations remain on the positive side. Near-term outlook clouded by BP oil spill and Australia’s RSPT. While we are positive on Petronas’ shift back to domestic investments, instead of overseas exploration, we believe sizeable offshore contracts in Malaysia and overseas would likely see delays in the near term given the uncertainties caused by the BP oil spill in the Gulf of Mexico as well as by Australia’s proposed Resources Super-Profit Tax. Sector could see further de-rating. We thus believe the market is already looking at uninspiring medium-term earnings growth for the O&G service providers. Already, Singapore peers are trading average FY11 PER of 12.7x, which compares to its high of 15.5x in mid-April 2010. In our view, there could be further de-rating of the sector, or at best share prices will remain stuck at current levels for the next six months. Downgraded to Neutral. Although the longer-term earnings visibility for O&G service providers remains intact on the back of reserve replenishment activities, we believe the focus will be on the near-term uncertainties and risk of earnings disappointment. Therefore, while we have rolled forward our valuation base year to FY11 (from FY10 previously), we have also pulled back our target PERs for the oil & gas stocks under coverage. Against this backdrop of uncertainty, we downgrade the sector to Neutral from overweight.

Table 2. Basis For Fair Value Estimates Valuation Basis Target PER of 15x FY11, premium to the sector benchmark due to good management and robust balance sheet. EPIC Target FY11 PER at 10x to factor in flatter growth and smaller market cap. Kencana Target FY11 PER at 13x, in line with the sector benchmark. KNM Target FY11 PER at 10x to factor in flatter growth and higher earning risk. Petra P’dana Target FY11 PER at 10x for marine, plus share of Petra Energy’s FV at 9x. PetGas DCF SapCrest Target FY11 PER at 13x, in line with the sector benchmark. Wah Seong Target FY10 PER at 13x, in line with the sector benchmark. Source: RHBRI Company Dialog

Wong Chin Wai (603) 92802158 wong.chin.wai@rhb.com.my

Yap Huey Chiang (603) 92802171 yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.
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10 June 2010

Crude Oil Price Outlook Has Changed

Oil price assumptions. We note that the US EIA in its most recent Short-Term Energy Outlook report lowered its 2010 forecast for average WTI spot prices to US$78.75/barrel from last month’s projection of US$82.18. In addition, the agency also cut its outlook for global oil consumption in 2010 to 85.51m barrels per day (bpd) from last month’s projection of 85.55m bpd, although we note this is still 1.8% higher vs. 84.01m bpd in 2009. While the anticipation of stronger crude oil demand in tandem with global economic recovery has previously helped to support crude oil prices above US$65/barrel, we believe the near-term outlook has turned cautious. Demand for crude oil remains relatively lacklustre, while supply remains ample. Moreover, financial demand has dwindled due to credit tightening. In the absence of fundamental catalysts for crude oil prices to move higher, we have assumed prices will continue to hover at current levels of US$65-75 at least through the 2H10, before picking up slightly in 2011 to a range of US$75-85. In our view, longer-range projections are unreliable at this stage, although our expectations remain on the positive side. 1) Lower energy demand ahead as manufacturing growth in Asia slows. We believe energy demand would likely decline as manufacturing growth across Asia continues to moderate. While manufacturing activity in China, Australia, Taiwan and South Korea remained in expansionary territory, the May data continued to show a trend of slowing monthly growth as various governments’ policy-tightening measures coupled with weaker business confidence affected by Europe’s sovereign-debt crisis began to crimp factory output. 2) Diesel demand from Europe has weakened substantially. Substantial deterioration in the European economic environment in recent months stemming from the sovereign debt-cum-currency crisis has led to more dramatic decline in diesel demand, likely reflecting their weaker economies. We highlight that the collapse in diesel cracks reflects the demand concerns in the market, as cracks generally reflect end-use demand. Nevertheless, the recent weakness is expected to persist, a somber view shared by RHBRI’s economics team on Europe’s economic growth in coming months. 3) Supply remains more than ample. We understand that the glut of crude oil that has built up in offshore tankers rose by a sharp 25% mom to 81m barrels in April as declining refinery demand for crude in Europe and shut-down of major refineries for maintenance in Asia moved oil back offshore. Furthermore, we note that the levels of onshore storage level in US and Canada are still brimming above historical averages amidst rising crude oil production from non-Organisation of Petroleum Exporting Countries (non-OPEC) and still-weak demand from the US. Note that IEA recently revised up its 2010 forecast for crude production from non-OPEC to 52.3m bpd (vs. 52.1m bpd previously). 4) Financial demand dwindled. Crude oil futures are normally used as a financial hedge against inflation, but in the last 4-5 years, financial demand has also tended to be driven by expectations of physical demand and supply, and this has provided a boost to crude oil prices. However we highlight that financial demand has fizzled out amidst the tighter credit environment as well as the lacklustre recovery in crude oil demand growth in 2010.

Sector Outlook

BP’s oil spill in the Gulf of Mexico could adversely impact deepwater E&P activities. BP’s drilling disaster in the Gulf of Mexico has resulted in the US government imposing a 6-month moratorium on deepwater drilling in the region. We believe this may have repercussions for deepwater E&P activities in other regions. o More assets competition for fewer jobs. As it stands, deepwater exploration assets in the Gulf of Mexico are in limbo, and any prolonged freeze could result in these assets competing for jobs in other regions and thus put some downward pressure on charter rates. Tighter safety regulations could delay award of new contracts. Secondly, with the US currently in the process of imposing tighter safety regulations on deepwater E&P activities, we believe tougher regulatory rules could also be adopted in other oil producing regions, potentially causing a delay in new contracts as safety requirements are reviewed. This is already happening in the North Sea and China. For E&P players, this could translate to additional requirements for safety equipment as well as higher operating costs, and imply potentially escalation in investment hurdle rates. Notwithstanding any delays in award of new contracts, euipment and support services providers that are able to meet these requirements could potentially benefit. These include Dialog (which supplies specialist products and services as well as advanced

o

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10 June 2010 catalyst handling services downstream), Wah Seong (which fabricates and leases gas compressors) and KNM (which fabricates high-end process equipment).

Australia’s Resources Super-Profit Tax is a concern to PSCs. We understand that Australia’s onshore mining, metals and hydrocarbon projects (i.e. coal seam gas and LNG projects) would be significantly affected by the proposed new tax on resource-based companies. Recall that the Australia government recently proposed a 40% Resource Super Profits Tax (RSPT) in addition to the country’s existing corporate tax rate of 30%, which if approved will become effective from 1 July 2012. We highlight the risk of deferment and delay in contracts as the new tax regime could adversely impact investment returns for such projects. Already, Petronas has turned cautious on its investment in the Gladstone LNG project in Queensland and is currently reviewing the viability of the project in view of the proposed new tax. We note that Wah Seong, Kencana and KNM have tendered for some of the sub-contract jobs which include the Santos Gladstone LNG, Queensland Curtis LNG and Surat Gladstone coal seam gas project. Petronas redirecting capex into domestic & proven resources. It was reported that Petronas’ new president and CEO Datuk Shamsul Azhar announced that the company’s capex strategy will shift back to the development of oil and gas reserves in Malaysia instead of overseas exploration. Already, ExxonMobil and Petronas Carigali recently announced capex of around US$1-2bn for the enhanced oil recovery project in Tapis field beginning 2013. While we are positive on this development as this will sustain a base level of activity for the support services players, we believe sizeable contracts both in Malaysia and overseas risk being delayed or deferred amidst the new uncertainties caused by the Gulf of Mexico disaster. Sector could see further de-rating. We thus believe the market is already looking at uninspiring mediumterm earnings growth for the O&G service providers. Already, Singapore peers are trading average FY11 PER of 12.7x, which compares to its high of 15.5x in mid-April 2010. In our view, there could be further de-rating of the sector, or at best share prices will remain stuck at current levels for the next six months.
Table 3. Singapore Peer Comparisons Company Sembcorp Keppel Corp KS Energy Ezra Holdings CH Offshore Swiber Holdings Market cap weighted average Source: Bloomberg, RHBRI Bloomberg ticker SMM SP KEP SP KST SP EZRA SP CHO SP SWIB SP Market cap (S$m) 7,698 13,540 468 1,175 363 465 FY11 PER (x) 14.7 12.4 9.4 8.0 4.9 5.9 12.7

Sector Valuations

Sector valuations reviewed. We have thus reviewed our valuation targets for the oil & gas stocks under coverage. While we have maintained our sector benchmark PER at 13x, we have rolled forward our vauation base year to FY11, from FY10 previously. We have also lowered our target PERs for individual stocks based on their risk profiles. 1) Premium plays – Target PER lowered to 15x from 16x. We continue to believe the more consistent, and conservatively-managed companies deserve to trade at a premium to the sector benchmark. However, we have lowered our target PER to 15x (from 16x previously) to be in line with our target PER for the market based on Dec 2011 earnings. Dialog remains the only player at this level due to its earnings consistency, focus on moving up the value chain, and early interest in acquiring newer technology. 2) Growth plays – Now pegged at 13x. While we were previously quite optimistic about the middle-tier players which appeared to be winning contracts, and had the capacity to grow significantly, the near-term uncertainty in the industry has shifted the attention to the potential earnings risk due to high gearing and competitive conditions in their respective sub-sectors. As a result, we have cut our target PER for this group to 13x (from 16x), i.e. in line with the sector benchmark. These stocks include Kencana, Wah Seong and SapuraCrest. The three companies are major players in their respective sub-sectors, and have strong earnings growth over the next two years but we take note of potential risk to earnings if new contracts do not materialise.
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10 June 2010 3) Stocks with downside risk to earnings. At the bottom, we highlight the laggards which will likely continue to be hampered by fundamental issues, such as Petra Perdana’s continuing tussle with its associate Petra Energy, and KNM’s exposure to Europe and to higher-end market which is likely to be more heavily affected by an uncertain crude oil price outlook. We have thus pegged both stocks at at 10x FY11 PER (vs. 13x FY10 PER previously). 4) Petronas Gas continues to be valued on a DCF basis, while we maintain our target PER for EPIC at 10x (albeit based on FY11 EPS vs. FY10 previously).

Oil & Gas Stocks – Valuations And Recommendations Dialog (OP, FV = RM1.23)

Potential upside to earnings would be driven by stronger E&C orderbook. Dialog’s earnings growth is primarily derived from expansion of recurrent downstream specialist services e.g. maintenance, catalyst handling, and tankage. Nevertheless, we highlight that potential upside to FY11-12 earnings would be driven by stronger E&C orderbook arising from expansion of TLP and EPCC jobs for both TLP T2 and Pengerang Terminal as well as potential large and long-term catalyst handling projects with American and Europe-based clients. Still our top pick for the sector. We have trimmed our SOP fair value to RM1.23/share (from RM1.29/previously), assuming 15x FY06/11 PER (vs. 16x FY06/11 PER previously) for the core operating business. Nevertheless, we continue to like the company’s conservative and asset-light strategy driven by strong management. Furthermore, we highlight that the company is one of the potential beneficiaries to stronger demand for specialist products and services assuming stricter requirements are imposed on deepwater E&P projects. Hence, given potential 17% upside to our new fair value, we reiterate our Outperform call on the stock. Dialog remains our top pick for the sector.
Table 4 : Investment Statistics (DIALOG; Code: 7277) Net FYE Jun 2009 2010f 2011f Turnover (RMm) 1,104.3 1,114.5 1,314.8 Profit (RMm) 92.2 126.0 183.2 EPS# (sen) 6.6 6.4 9.3 EPS Growth (%) 22.0 (3.4) 45.4 PER (x) 15.9 16.5 11.3 C.EPS* (sen) 6.0 7.0 P/NTA (x) 3.4 4.1 3.4 P/CF (x) 13.6 14.3 10.2 Bloomberg: DLG MK Net Gearing (x) Net cash Net cash Net cash ROE (%) 22.7 26.8 32.6 GDY (%) 3.5 3.3 4.8

2012f 1,490.6 223.0 11.3 21.7 9.3 8.0 2.8 Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC # Excl EI

8.6 Net cash 32.8 5.9 * Consensus Based On IBES Estimates

SapuraCrest (MP, FV = RM2.16)

Earnings visibility remains bright. We reiterate that medium-term earnings visibility remains bright on the back of: 1) RM9.1bn orderbook and stronger orderbook replenishment from overseas (i.e. India and Australia) for its IPF division; 2) better cost control given ownership of its own IPF vessels as well as cost pass-through contract; and 3) stronger growth in rates for its drilling division. However, we believe SapuraCrest will be similarly affected by the more cautious sentiment towards the sector. Downgraded to Market Perform. Therefore, we have pulled back our target PER for the stock to 13x (from 16x previously), which results in our fair value being reduced from RM2.16/share to RM2.39, based on FY01/12 EPS (vs. FY01/11 previously). Hence, given limited upside to our new fair value, we have downgraded the stock to Market Perform (from outperform previously).

Table 5: Investment Statistics (SAPCRES; Code: 8575) Net FYE Jan 2010 2011f 2012f Turnover (RMm) 3,257.3 4,829.8 5,403.1 Profit (RMm) 170.2 231.0 254.8 Basic EPS (sen) 13.3 16.6 18.3 Adj. FD EPS (sen) 12.3 16.6 18.3 FD EPS Growth (%) 46.1 35.7 10.3 FD PER (x) 16.7 12.3 11.2 C. EPS* (sen) 15.0 17.0 18.0 P/NTA (x) 2.2 1.9 1.6 1.4

Bloomberg: SCRES MK Net P/CF (x) 7.9 5.3 4.7 gearing (x) 0.6 0.3 0.1 GDY (%) 3.4 3.4 3.4

2013f 5,533.6 264.7 19.1 19.1 3.9 10.8 Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC

4.5 (0.1) 3.4 * Consensus Based On IBES

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10 June 2010 Kencana (MP, FV = RM1.52)

Higher utilisation rates ahead. Kencana is currently tendering for another RM4bn worth of orders, which include fabrication contracts in Malaysia, Myanmar, Vietnam and India as well as the long-awaited Sabah Oil & Gas Terminal. With the upgrade in the Lumut yard (i.e. tonnage handling capability increased to 30,000 tonnes from 20,000 tonnes previously) nearing completion, we believe Kencana stands a good chance of securing higher-margin deepwater jobs. In tandem with the growing orderbook, we highlight that FY11-12 utilisation rate is expected to increase to 85% and 92% respectively from the estimated 45-55% in FY10. However, we highlight the downside risk if there is any delay in fabrication jobs over the next 6-12 months amidst the uncertain outlook for the sector. Downgraded to Market Perform. We continue to like Kencana given its: 1) proven earnings track record; 2) strong management; and 3) plans to diversify into more recurrent earnings. However, we believe the stock will perform no better than the market in the near term. We have thus lowered our fair value from RM1.88/share to RM1.52/share, based on 13x FY11 PER (vs. 16x FY11 PER previously). Given the limited upside to our new fair value, we have downgraded the stock to Market Perform (from outperform previously).

Table 6: Investment Statistics (KENP; Code: 5122)

Bloomberg: KEPB MK

Net
FYE July 2009 2010f 2011f

EPS EPS (sen)
7.1 10.2 11.7

Net PER (x)
19.5 13.6 11.9 10.8

Revenue (RMm)
1,140.8 1,458.8 1,632.6

Profit (RMm)
118.2 169.0 194.4

Growth (%)
(24.3) 42.9 15.0 10.2

C.EPS* (sen)
9.0 11.0 12.0

P/NTA (x)
4.5 2.7 2.1 1.7

P/CF (x)
13.2 10.1 9.0 8.1

ROE (%)
21.4 19.1 17.4

Gearing (x)
Net cash Net cash Net cash

GDY (%)
0.4 0.5 0.6

2012f 1,750.0 214.2 12.9 Mesdaq Board Listing / Non-Trustee Stock

15.5 Net cash 0.7 * Consensus Based On IBES

Wah Seong (MP, FV = RM2.38)

Medium-term earnings growth capped by weak contribution from the engineering division. As we highlighted above, we see potential risk in future oil & gas investments in Australia due to the proposed RSPT, and this could also affect future pipeline projects in the country. In addition, we highlight that medium-term earnings growth would likely be capped by still-weak contribution from the engineering division. Note that while utilisation rates for the compressor fabrication yard in Batam remains above 70% mainly supported by fabrication of smaller modules for Pertamina, we understand that utilisation rates for Singapore, Shah Alam and China yards have fallen to below 50% (vs. average 70% in 2008). Nevertheless, we expect demand for gas compressors and FPSO topsides to pick up momentum on the heels of stronger E&P activities stemming from the long-term uptrend in crude oil price. Maintain Market Perform. Given the downward revision in our target PER from 16x to 13x, we have lowered our fair value to RM2.38 (from RM2.57 previously), based on 13x FY11 PER (vs. 16x FY10 PER previously). With M&A deals now pushed out, and potential for more earnings disappointment in the 2QFY10, we thus reiterate our Market Perform call on the stock.

Table 7: Investment Statistics (WASEONG; Code: 5142) Net FYE Dec 2009 2010f 2011f 2012f Turnover (RMm) 1,950.3 2,374.4 2,642.0 2,396.2 profit (RMm) 121.3 149.7 170.9 168.7 Basic EPS# (sen) 17.1 21.1 24.1 23.8 FD EPS# (sen) 13.1 16.1 18.3 18.1 FD EPS Growth (%) 29.4 23.1 14.0 (1.2) FD PER (x) 16.9 13.7 12.0 12.2 C.EPS* (sen) 18.0 20.0 21.0 # Excl EI P/NTA (x) 3.5 2.8 2.2 1.9 (x)

Bloomberg: WSC MK Net P/CF 19.8 4.7 4.8 10.6 Gearing (x) 0.4 0.5 0.5 0.5 GDY (%) 3.3 2.9 3.3 3.2

Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC

* Consensus Based On IBES Estimates

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10 June 2010 KNM (UP, FV = RM0.49)

Higher earnings risk. With crude oil price likely to remain flattish over the medium-term which would have an impact on non-conventional projects with higher investment hurdle rates, and notwithstanding the possible delays in deepwater projects caused by BP’s Gulf of Mexico disaster, the demand outlook for higher-end process equipment has become less certain again. Hence, we believe this could potentially result in: 1) lower utilisation rates (with current 30-40% of spare capacity); and 2) delay in capacity expansion plan for its Canada plant targeted at the oil sands projects there. FY10-12 earnings cut. All in, we have cut our FY10-12 earnings estimates by 6.4-9.9% p.a. after revising down our capacity utilisation FY10-12 by 8-15% p.a. to factor in lower demand for process equipment. We have also cut our target PER to 10x, from 13x previously. Nevertheless, as we have rolled forward our valuation base year to FY11 (from FY10 previously), our fair value has been raised to RM0.49 (from RM0.40). Despite the upward revision in fair value, KNM remains an Underperform as we see limited upside in its share price.

Table 8 : Investment Statistics (KNM; Code: 7164) Net FYE Dec 2009 2010f 2011f Turnover (RMm) 2,469.6 2,053.1 2,462.7 profit (RMm) 150.8 114.5 194.4 EPS (sen) 3.8 2.9 4.9 Growth (%) (55.2) (24.1) 69.7 PER (x) 13.3 17.5 10.3 C.EPS* (sen) 5.0 7.0

Bloomberg: KNMG MK

Net P/CF (x)
(7.2) 14.2 11.8 8.6

P/NTA (x)
10.2 8.0 5.2 3.4

ROE (%)
14.8 6.3 10.2

Gearing (%)
0.6 0.6 0.6

GDY (%)
4.0 4.0 4.0

2012f 2,915.4 260.9 6.5 34.2 7.7 8.0 Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC

12.5 0.5 4.0 * Consensus Based On IBES

Petra Perdana (UP, FV = RM1.15)

Tussle with Petra Energy and former CEO continues to hamper the business. Although the new management has now been in place for four months, we continue to see disruptions to management resources from ongoing lawsuits by the former CEO, as well as well as a renewed boardroom tussle at its associate Petra Energy. As for the business, we believe lease charges and related costs would likely impact FY10 earnings given mobilisation costs for the eight vessels (with six vessels from China shipyard) as well as the lacklustre vessel charter market, and this could potentially give rise to earnings disappointments in coming quarters. The delivery of seven vessels (four AHTS, three workbarge) between Jun-Dec 2010 period could further affect costs if charter rates and vessel utilisation do not pick up. FY10-12 forecasts cut. We have thus cut our FY10-12 EPS forecasts by 16-28% p.a. to reflect the uncertain earnings outlook. We note however that earnings are highly sensitive to vessel charter and utilisation rates, and any pick up in FY11 could be sharply positive for the company. Maintain Underperform. We have rolled forward our valuation base year from FY10 to FY11 but cut our target PER from 13x to 10x. Together with the downgrade in our FY10-12 EPS forecasts, our fair value is nudged up slightly to RM1.15 (vs. RM1.00 previously). We have thus maintained our Underperform call on the stock.

♦ ♦

Table 9: Investment Statistics (PETRA; Code: 7108) Net FYE Dec 2009 2010f 2011f 2012f Turnover (RMm) 605.7 297.4 346.4 363.2 profit (RMm) 29.3 20.2 36.3 57.7 EPS (sen) 9.8 6.8 12.2 19.4 Core EPS# (sen) 9.8 6.8 12.2 19.4 EPS Growth# (%) (53.1) (31.1) 79.9 59.0 PER# (x) 12.1 17.6 9.8 6.1 C.EPS* (sen) 12.0 20.0 21.0 # Excl EI P/NTA (x) 0.7 0.7 0.7 0.6

Bloomberg: PETR MK Net gearing (x) 0.1 (0.2) (0.2) (0.2) ROE (%) 6.0 4.0 6.9 10.1 NDY (%) 1.3 1.3 1.3 1.3

Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC

* Consensus Based On IBES Estimates

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10 June 2010 EPIC (OP, FV = RM2.72)

Focus on KSB expansion. Of all the oil & gas stocks, EPIC probably has the least exposure to potential delays in deepwater jobs, given it services mainly shallow water contractors offshore Terengganu. Management highlighted that the company will focus on the expansion of KSB under Phase 3. The land clearing work started in 3Q 2009 and Phase 3 would be operational in 2Q 2010. The addition of 97 acres for Phase 3 is expected to increase KSB’s landbank to 419 acres. The company already has one confirmed customer (i.e. Total) for Phase 3 and expects another three more in the short term. We have tweaked upwards our fair value to RM2.72 (from RM2.69 previously), based on 10x FY11 PER (vs. FY10 PER previously). We believe our target price has adequately discounted the execution risks as well as the company’s relatively small market cap. We thus maintain our Outperform call on the stock although we note that the current discount valuations may prevail given the market’s aversion to illiquid stocks.

Table 10: Investment Statistics (EPIC; Code: 8265) Net FYE Dec 2009 2010f 2011f Turnover (RMm) 184.0 222.7 232.9 Profit (RMm) 42.3 45.6 46.1 EPS (sen) 24.9 26.9 27.2 Adj EPS# (sen) 24.9 26.9 27.2 Adj EPS Growth# (%) 81 8 1 PER (x) 6.5 6.0 6.0 C.EPS* (sen) 28.0 28.0 30.0 # Excl. EI P/NTA (x) 0.9 0.8 0.7 0.7 Net

Bloomberg: EPIC MK Gearing (x) 0.5 0.5 0.5 ROE (%) 13.4 13.3 12.3 GDY (%) 5.4 5.8 5.9

2012f 271.5 50.8 30.0 30.0 10 5.4 Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC

0.5 12.5 6.5 * Consensus Based On IBES

Petronas Gas (MP, FV = RM10.71)

Moving to transmission-based business. We highlight the key driver for the revised GPTA is to tap into the growth potential of the gas transportation business arising from higher demand for processed gas transmission (vs. unprocessed gas from offshore Peninsular Malaysia) over the long term. We believe the clear demarcation between processing and transmission fees would enable Petronas Gas to grow its transmission-based business to offset declining earnings from gas processing business stemming from the lower gas output in Peninsular Malaysia. Meantime, notwithstanding lower throughput processing fees for its domestic operation, we believe Petronas Gas still offers relatively secure earnings, guaranteed by the Reservation Charge, and this will also underpin dividend payouts. Therefore, we believe annual dividend yields of 5-7% p.a. will likely continue to support the share price. Hence, we reiterate our Market Perform call on the stock with unchanged DCF-based fair value of RM10.71/share.

Table 11 : Investment Statistics (PETGAS; Code: 6033) Net FYE Mar 2010 2011f 2012f 2013f Turnover (RMm) 3,221.8 3,308.3 3,348.2 3,411.3 profit (RMm) 940.7 1,238.2 1,273.6 1,324.8 EPS (sen) 47.5 62.6 64.4 67.0 Growth (%) 1.4 31.6 2.9 4.0 PER (x) 20.7 15.7 15.3 14.7 C.EPS* (sen) 60.0 63.0 63.0 P/CF (x) 12.4 10.6 10.4 10.1 P/NTA (x) 3.0 3.0 3.1 3.1 Net

Bloomberg: PTG MK Gearing (x) Net cash Net cash Net cash Net cash ROE (%) 11.3 14.5 14.5 14.5 GDY (%) 5.2 6.8 7.0 7.3

Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC

* Consensus Based On IBES Estimates

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10 June 2010 Conclusion

Sector downgraded to Neutral. Although the longer-term earnings visibility for O&G service providers remains intact on the back of reserve replenishment activities, we believe the focus will be on the near-term uncertainties and risk of earnings disappointment. Therefore, while we have rolled forward our valuation base year to FY11 (from FY10 previously), we have also pulled back our target PERs for the oil & gas stocks under coverage. Against this backdrop of uncertainty, we downgrade the sector to Neutral from overweight.

Table 12: Oil And Gas Fair Value Calculations Share Price (RM) Dialog EPIC Kencana KNM Petra Perdana Petronas Gas SapuraCrest Wah Seong 1.05 1.62 1.39 0.50 1.19 9.83 2.05 2.20 New FV (RM/share) 1.23 2.72 1.52 0.49 1.15 10.71 2.16 2.38 Old FV (RM/share) After 1.29 2.69 1.88 0.40 1.00 10.71 2.39 2.57 15x FY11 PER plus DCF for Kertih Terminals and TLP tank terminals at WACC of 15% 10x FY11 PER 13x FY11 PER 10x FY11 PER 10x FY11 PER for operating earnings plus share of Petra Energy fair value at 9x DCF with WACC of 9% 13x FY11 PER 13x FY11 PER MP MP MP MP OP MP OP MP UP UP OP OP UP UP OP Before OP Basis Of Valuation Rec

Source; RHBRI estimates

Chart 1: KNM Technical View Point

After a significant rally to a high of RM1.09 in Jun 2009, the share price of KNM fell to a lower trading range between RM0.69 and RM0.85 levels after a sharp correction phase. However, after stabilising around the region for nearly nine months, the stock plunged to below RM0.69 level in Apr 2010, with a huge technical gap at RM0.685 – RM0.725. The stock extended its losing streak and continued to slide towards the RM0.50 key support level. But, as momentum continued to deteriorate, the stock slipped to below the RM0.50 stronghold in recent sessions. Technically, it is critical for the stock to regain the RM0.50 level in the near term. Otherwise, the chart outlook is likely to turn more bearish ahead. Next effective stronghold is only seen at RM0.385.

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10 June 2010
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